January 2016

The United States Attorney for the District of Massachusetts announced that it indicted two construction company executives for running what the Department of Justice calls “a fraudulent “double breasted shop” scheme.” The DOJ charged Christopher Thompson and Kimberly Thompson on 18 counts of mail fraud, one count of benefit fund embezzlement, and 18 counts of filing false documents with an ERISA fund. A copy of the indictment can be found here.

The facts set forth in the indictment are not ground breaking. One company, Air Quality Experts, Inc., was an asbestos abatement contractor established in 1987. Air Quality was not a signatory to any collective bargaining agreement. In 2005, the owners of Air Quality set up the creatively named AQE, Inc., which signed a collective bargaining agreement with the Massachusetts Laborers District Council. According to the indictment, AQE operated out of the same office, used the same equipment, operated under the same management, and, critically, used the same employees, as Air Quality. However, AQE did not submit fringe benefits for the members of the Laborers Union for the work they performed for the non-signatory entity, Air Quality.

While the facts of this indictment are not groundbreaking, the fact that the Department of Justice indicted the owners of the improperly established and maintained double breasted operation is tremendous. Normally, an improperly established and maintained double breasted operation would result in a civil lawsuit by a union seeking to recover fringe benefits owed for work performed by the non-union entity. While the civil liability in those cases can be significant, it never meant jail time for the owners of the double breasted firms. Therefore, this case significantly ups the ante for firms that have double breasted operations, but who fail to properly maintain them.

There is nothing wrong or illegal about a double breasted operation per se. In fact, both firms can even have common ownership. However, they never can have common employees, common equipment, and common management. That is what apparently did in the owners of AQE and Air Quality.

The saga involving Toll Brothers’ Society Hill Playhouse project shows that something is rotten in the state of Philadelphia’s development process. This rottenness has resulted in a project that is ultimately worse practically and aesthetically for the neighborhood. Even worse, apparently the neighborhood is fine with this.

This story begins with Toll Brothers’ plans to demolish the Society Hill Playhouse and replace it with apartments. The current zoning of the property allows Toll Brothers to build a four story multifamily building by right. This means Toll Brothers does not have to request a variance from the Zoning Board of Adjustment to construct a four story building. But, more on that later. The economics of a four story building mean that it cannot have a dedicated on-site parking garage. So, Toll Brothers sought to build a five story structure with indoor parking. However, a five story structure would require a variance. The process to request a variance is where the absurdity of this story unfolds.

Years ago, Philadelphia established a system that required developers to meet with neighbors to receive input on proposed development. The reason for this was two-fold. First, the City’s long outdated zoning code required almost all modern projects to obtain a zoning variance. Rather than turning the ZBA hearing into even more of a circus than it already is, officials decided that it would be a good idea for developers to address concerns directly with neighbors before coming before the ZBA for a variance. Second, in theory, it prevented developers from running rough shot over neighborhoods. However, the road to hell is paved with good intentions.

A well intentioned process to have developers meet with neighbors about development has spawned a quasi-governmental leviathan known as “registered community organizations.” RCO’s, as they are known, are the key to obtaining a zoning variance. Many RCO’s are well-organized and come complete with their own zoning committees and zoning boards. Many RCO’s require developers to present their projects before these zoning committees before it will support a project. The problem with RCO’s is that they are beholden to no one and are not required to follow any established procedures. RCO officials are not elected so they cannot be held accountable at the ballot box. Moreover, RCO meetings are not required to follow any sort of established procedures. If you feel you are treated unfairly or unequally before an RCO, too bad.

While the law does not explicitly require the support of a RCO in order to obtain a variance, economics does. This is because our system allows anyone with an axe to grind to appeal a decision of the ZBA. So, even if a developer is successful in obtaining a variance for a project from the ZBA, the RCO or any neighbor can file an appeal with the Court of Common Pleas which asks the Court to overturn the ZBA’s decision. If the RCO is not successful at the trial court level, it can appeal it to the Commonwealth Court and from there the Pennsylvania Supreme Court. This process can take years and a project is held in limbo while the matter works its way through the system. Therefore, it is important for a developer to propose a project that the RCO agrees with. This is where the problem lies.

Toll Brothers presented its five story project that included indoor parking to the Washington Square West RCO. However, neighbors raised objections to the plan because of the height of the proposed structure. Toll Brothers tried to work with the neighbors to ally their concerns, however, the neighbors (who are probably opposed to any development in any form)knowing the power they hold still objected. So, rather than have its proposed five-story project held up on appeal for years, Toll Brothers decided to simply build what it was allowed to do by right. The absurd mentality of the anti-development luddites is best summed up by this quote from Jared Brey’s story about the project:

“I support the city’s goal of reducing the cars, the congestion and the terrible expense of maintaining the roads and everything that goes with that,” she said. “Full disclosure: we have a parking space. But if we didn’t have a parking space we wouldn’t have a car.”

In other words, it’s ok for me to have parking and a car, but not you, so I will object to your project. (I bet this person also supports laws restricting “carbon emissions” but has Bigfoot sized carbon footprint.) As a result, 80 new cars will be added to the on street parking in the community, which lies just North of already congested South Street. Furthermore, the new project does away with a setback and more aesthetically pleasing brick façade cladding.

Ultimately the neighborhood fell victim to the runaway power of RCO’s and neighbors to arbitrarily stop a project they do not agree with for any reason. Toll Brothers tail is not isolated and the result here will repeat itself unless the process is fixed.

So what can be done? First, RCO officials must become elected officials who must answer at the ballot box for their decisions. Second, the City must establish formal written rules of procedure that apply to RCO meetings regarding development project. Third, the hurdle to appealing a ZBA variance needs to be raised substantially and we need to consider requiring an unsuccessful appellant to pay for a developer’s attorneys fees in defending the appeal. Only then can some sanity be brought to the way properties are developed in the City.

About the Author

Wally represents contractors (and subcontractors) and developers. His clients build and develop residential, commercial, and industrial properties nationwide. Wally enjoys working with the owners of the businesses he represents because they tend to be entrepreneurs and all around interesting people.